Macadamian Blog

Enterprise Software companies - Be Afraid. Be Very Afraid

If you've never read the Innovator's Dilemma, I'll sum it up for you because it's central to this post: In any industry, and particularly innovation-driven industries, an innovator launches a compelling new product - let's say a video camera - that disrupts the industry before it, offering something new and novel. For a while, the innovator enjoys a lead, and the healthy profits that come with it. Soon other competitors join the fray, and the feature war ensues - how many buttons and features can you cram into the product to differentiate it? More megapixels, more modes, more zoom. Prices stay in the $2,000 range, but soon, every product is indistinguishable, and you're forced to compete on price, driving the price down by half. Eventually, someone comes along and figures out that most consumers only use 20% of the features, and makes a simpler version for cheaper price, and now all someone's willing to pay for a video camera is, at most, $200.

There's a new breed of Enterprise Software companies, and they are doing exactly that in the software industry.

For about 20 years, Enterprise Software has enjoyed healthy profits. The products - ERP systems, CRM software, workflow automation - promised streamlined operations and productivity gains. As each space became more competitive, the feature war escalated. The systems were crammed with more and more features, until they could do virtually anything. The problem is they have become so complex that they’re the brunt of industry jokes. SAP has suffered a reputation of multi-million dollar deployments, failed roll-outs, and installations that take years longer than promised to provide an ROI. Enterprise software used high-powered sales people to sell feature-loaded software on promises of interoperability and open-architecture to CIOs that actually care about that sort of thing. As products become less and less differentiated, the vendor was forced to discount.

Sound familiar?

It should, because most enterprise software is well into it's mature, mainstream market stage, and starting to suffer from the Innovator's Dilemma. There's a new breed of startups that are about to disrupt their business models with simpler, cheaper products. Their secret weapon? Design thinking.

Take startups like Mint.com and Square. Design is in their DNA. Most of them have something you almost never see on the management team page of a large enterprise software company - a VP of User Experience. Nodeable lists a Creative Director as one of their key employees.

These products are designed with the customer experience in mind from day one. Their design team is fully integrated with the development team. They started with close contact with their potential users, trying to discover the most valuable features most people need - throwing out everything else, and focusing on doing those few things exceptionally well. They pay attention to interaction design and appealing visual design, and because the designers were involved throughout the development cycle, there are few inconsistencies in the UX for feature creep.

Contrast that to many enterprise companies, where they have hired a UX team, but they’re siloed in their own department. Product teams have to compete for their attention. And, while the monolithic enterprise software companies struggle to figure out how to extend their products to mobile, many of these startups are starting with mobile in mind.

These startups are disrupting their space. Their products are easy to use, easy to try, and easy to buy. Often, they are priced in ways that departments, or small-medium businesses can afford them. What's more, with the consumerization of the IT department, IT is losing their purchasing power. Departments tired of the big, complex products and waiting months to see new features implemented, are going rogue and switching to simpler products that meet 80% of their needs for 20% of the cost (and headaches).

What's a big enterprise software company to do?

Your best defense, aside from acquiring the competing startup, is to cannibalize your own product before someone else does. That's not to say you shut down your current product, which will likely provide a steady revenue stream for years to come, but nothing should stop you from taking the same approach as a startup, and developing your own competing product. In fact, you have a leg-up - you have more resources, more experience, and access to customers. Create a small skunkworks team, consisting of a product manager, a user researcher, an interaction designer, a visual designer, a few engineers, and quality assurance. Have them work independently of your current process, and have them all start the project at the same time, working in agile sprints. Have product management, design, engineering, and quality all contribute to the initial ideation, so that they are baked in from the get-go. Start with equal emphasis on making the product useful on mobile devices and the web.

As a bonus, you will start to learn things from your internal startup that you can apply to your main product stream. Having designers and developers working side by side, for instance, will pay huge dividends in the usability and competitiveness of your main product. This is something Intuit learned early, and has helped keep their edge in very competitive segments.

Your biggest enemy will be old habits - falling prey to the feature bloat that has made your product successful to date. But beware, as your lead won't last forever. Around the corner are two smart people in a garage, and I can bet one of them is a UX designer, and they’re getting ready to eat your tasty lunch.